the cairns group -...

abare research report 06.11

the cairns groupcatalyst for agricultural trade reform

roneel nair, daniel mcdonald, michael chen, don gunasekera and brian s. fisher

september 2006

abarewww.abareconomics.com

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© Commonwealth of Australia 2006

This work is copyright. The Copyright Act 1968 permits fair dealing for study, research, news reporting, criticism or review. Selected passages, tables or diagrams may be reproduced for such purposes provided acknowledgment of the source is included. Major extracts or the entire document may not be reproduced by any process without the written permission of the Executive Director, ABARE.

ISSN 1037-8286 ISBN 1 920925 66 X

Nair, R., McDonald, D., Chen, M., Gunasekera, D. and Fisher, B.S. 2006, The Cairns Group: Catalyst for Agricultural Trade Reform, ABARE Research Report 06.11, Canberra, September.

Australian Bureau of Agricultural and Resource Economics GPO Box 1563 Canberra 2601

Telephone +61 2 6272 2000 Facsimile +61 2 6272 2001 Internet www.abareconomics.com

ABARE is a professionally independent government economic research agency.

ABARE project 3155

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the cairns group abare research report 06.11

foreword

The Cairns Group has been an important catalyst for global agricultural trade reform. Formed in 1986, the coalition of agricultural exporting countries has constructively influenced multilateral trade negotiations, particularly during the Uruguay Round of negotiations. The Cairns Group has continued to advocate and pursue trade reform during the current WTO Doha Round of negotiations.

In this report, the prospects for increased Cairns Group trade are analysed to highlight the benefits of more market oriented multilateral agricultural trade reform. Release of the report has been timed to coincide with the 20th Anniversary Ministerial Meeting of the Cairns Group, held in Cairns, Australia, on 20–22 September 2006.

Karen Schneider Acting Executive Director

September 2006

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acknowledgments

The authors wish to thank Sam Hester for his valuable contribution to the modeling in this project. Neil Andrews, John Wainio, Fran Freeman and Tim Yeend provided useful comments on an earlier draft of the report. The report was prepared in the International Branch under the management of Don Gunasekera. Overall profes-sional leadership and analytical guidance in preparing this report was provided by Brian Fisher.

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contents

summary 1

1 introduction 3

2 economic and trade orientation of Cairns Group countries 6

3 need for trade reform 14

4 impact of trade reform 20

description of scenarios 20quantitative analysis of scenarios 21

references 25

vi


boxes1 key outcomes of the Hong Kong ministerial meeting,

December 2005 152 key elements of the US, EU and G20 proposals 163 domestic support and WTO ‘boxes’ 17

figuresA country pairings formed by preferential trade agreements 3B shares of the value of key world agricultural exports 7C beef – share of world consumption, and tariffs, 2005 9D sugar – share of world consumption, and tariffs, 2005 9E rice (milled) – share of world consumption, and tariffs, 2005 10F soybeans – share of world consumption, and tariffs, 2005 11G wheat – share of world consumption, and tariffs, 2005 12H skim milk powder – share of world consumption, and tariffs,

2005 13I change in agricultural exports in 2016 under scenario 1,

relative to the reference case 22J change in agricultural exports in 2016 under scenario 2,

relative to the reference case 23

tables1 international frameworks through which Cairns Group

economies aim to foster freer trade 42 size and agricultural orientation of Cairns Group economies 63 recent analyses of potential economic benefits of

trade reform 14

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summary

> Cairns Group countries account for around 13 per cent of world economic output, almost 25 per cent of international agricultural exports and about 15 per cent of the global population.

> Since its establishment in 1986, the Cairns Group has been an important catalyst for global agricultural trade reform, particularly during the Uruguay Round of multilateral trade negotiations. The coalition of agricultural exporting countries has continued to advocate and pursue trade reform during the current Doha Round of negotiations.

> There are opportunities for agricultural trade reform in the Doha Round that could benefit the Cairns Group countries and the world more generally. These opportunities will be influenced by the extent to which the gap in the reform ambitions of key WTO member countries — in terms of improving agri-cultural market access and reducing trade distorting domestic support — can be narrowed.

> Considerable benefits would accrue to the Cairns Group countries and to other WTO members from a more reform oriented, or more market oriented, outcome in the multilateral trade negotiations. This is reflected in the estimated potential benefits from such an outcome.

> Two illustrative trade reform scenarios are analysed in this report. Both scenarios reflect elements of the negotiating proposals put forward by WTO member countries prior to the suspension of the Doha Round. The analysis is undertaken using ABARE’s global trade and environment model, with the aim of providing broad insights into the prospective benefits to all WTO members, including Cairns Group members, from increased trade.

Cairns Group member countries Argentina Australia Bolivia Brazil Canada Chile Colombia Costa Rica Guatemala Indonesia Malaysia New Zealand Pakistan Paraguay Philippines South Africa Thailand Uruguay

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> Analysis undertaken in this report indicates that a more market oriented multilat-eral agricultural trade reform outcome would increase the gross value of Cairns Group agricultural production by an estimated US$20 billion (in 2005 dollars) in 2016, relative to what would otherwise be the case (the ‘reference case’). This represents a nearly 5 per cent increase in the value of production in the agriculture sector in Cairns Group countries, in 2016. For agricultural producers in Australia, New Zealand, Argentina and Brazil, the estimated increase in the value of production is 4.9 per cent, 7.4 per cent, 5.6 per cent and 11.9 per cent respectively in 2016, relative to the reference case.

> Total agricultural exports from Cairns Group countries are estimated to expand by US$20 billion (in 2005 dollars) in 2016, relative to the reference case, under more market oriented trade reform. Developing countries in the Cairns Group would account for over two-thirds of the total increase in agricultural exports. There would also be substantial global benefits, with world agricultural trade estimated to increase by US$47 billion (in 2005 dollars) in 2016, relative to the reference case.

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introduction

The Cairns Group is a coalition of eighteen agricultural exporting countries aiming to bring about global agricultural policy reform by constructively influencing multilateral trade negotiations within the World Trade Organisation. The Cairns Group was established in August 1986, during the leadup to the Uruguay Round of multilateral trade negotiations, when trade ministers from fourteen countries met in Cairns, Australia. The original coalition of fourteen countries included Fiji and Hungary but did not include Bolivia, Costa Rica, Guatemala, Pakistan, Paraguay and South Africa.

The objective of the Cairns Group is to foster freer trade in agricultural products. Through advocating and pursuing agricultural trade reform the Cairns Group has shown significant progress toward meeting this objective and has made a substan-tial contribution, particularly during the Uruguay Round of trade negotiations. The Cairns Group has continued to pursue the trade reform objective during the Doha Round of trade negotiations, despite the suspension of the negotiations in July 2006.

In addition to using the WTO multilateral framework, Cairns Group countries have fostered more open trade through several other international frameworks (table 1).

Economic integration is an attractive option for Cairns Group countries, based on the number of preferential trade agreements that have been established in recent decades. The number of country pairings formed by these agreements has more than quadrupled from around 850 in 1988 to about 3700 in 2006 (figure A).

These agreements are intended to improve access to certain markets faster than what might be possible from the multilateral process. However, such agreements have not always resulted in freer agricultural trade because certain politically

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country pairings formed by preferential trade agreements

AFTA

MERCOSUR

TokyoUruguay

multilateral trade rounds Doha

KennedyDillon0

1000

2000

3000

1958 1982 19941970 2006

trade agreements

figA

CACM

CER

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sensitive products are often accorded special treatment or exemption from reform commitments.

Although Cairns Group members have the option of undertaking trade reform through preferential agreements, greater enhancement in trade and higher economic growth could be achieved if they remain active as part of the wider WTO multilateral trade reform process.

The continuing trade distorting agricultural policies of key countries have limited the export opportunities of the comparatively efficient agricultural exporters in the Cairns Group. Hence, Cairns Group member countries have a collective interest

table 1 international frameworks through which Cairns Group economies aim to foster freer trade

AFTA APEC CACM CAFTA-DR CAN CER MERCOSUR NAFTA SACU SAPTA

Argentina •Australia • •Bolivia •Brazil •Canada • •Chile •Colombia •Costa Rica • •Guatemala • •Indonesia • •Malaysia • •New Zealand • •Pakistan •Paraguay •Philippines • •South Africa •Thailand • •Uruguay •AFTA – ASEAN Free Trade Area; APEC – Asia Pacific Economic Cooperation; CACM – Central American Common Market; CAFTA–DR – Central America–Dominican Republic Free Trade Agreement; CAN – Andean Community; CER – Closer Economic Relations (Australia and New Zealand); MERCOSUR – Common Market of the Southern Cone; NAFTA – North American Free Trade Area; SACU – Southern African Customs Union; SAPTA – South Asian Preferential Trading Arrangements.

Argentina •

Bolivia •

Canada • •

Colombia •

Guatemala • •

Malaysia • •

Pakistan •

Philippines • •

Thailand • •

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in advancing policies that lower the distortions in world agriculture and enable improved access to markets. Achieving a more market oriented outcome in the multilateral trade negotiations would potentially have considerable benefits for the Cairns Group.

In the absence of an outcome that creates opportunities for enhanced world trade, impediments to freer trade will continue to hamper the growth potential and under-mine the efficient allocation of resources in many countries, including Cairns Group economies. In this report, the prospects for multilateral agricultural trade reform are assessed, with a particular focus on the potential opportunities for increased Cairns Group trade.

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economic and trade orientation of Cairns Group countries

In 2005, the Cairns Group accounted for around 13 per cent of world economic output, almost 25 per cent of international agricultural exports and about 15 per cent of the global population. Table 2 highlights the key indicators of the size and agricultural orientation of Cairns Group member countries.

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table 2 size and agricultural orientation of Cairns Group economies

agriculture agriculture agricultureGDP GDP share of labor share of share of

growth (PPP) a GDP population force labor force exports b total exports2006 f 2006 f 2005 2004 s 2005

% US$b % million million % US$b %

Argentina 7.3 567 10 39 18 8 40 49

Australia 2.9 663 4 20 10 4 106 26

Bolivia 4.1 27 16 9 4 44 3 30

Brazil 3.5 1 665 10 186 90 20 118 32

Canada 3.1 1 164 3 32 17 2 360 13

Chile 5.5 209 4 16 6 14 40 28

Colombia 4.5 358 12 46 22 23 21 21

Costa Rica 3.6 47 9 4 2 20 7 36

Guatemala 4.1 60 23 13 4 50 4 47

Indonesia 5.0 1 055 15 223 105 47 86 17

Malaysia 5.5 314 10 25 11 15 141 10

New Zealand 0.9 106 5 4 2 10 22 60

Pakistan 6.4 440 22 158 55 42 16 12

Paraguay 3.5 30 27 6 3 45 2 86

Philippines 5.0 443 14 83 36 36 41 6

South Africa 4.3 605 3 47 19 30 52 8

Thailand 5.0 584 10 64 35 49 110 17

Uruguay 4.0 36 11 4 2 14 3 63

a In purchasing power parity (PPP) dollars. b Total merchandise exports. f Forecast s EstimateSources: IMF (2006); United Nations (2006a); World Bank (2006); WTO (2006b).

Argentina 7.3 567 10 39 18 8 40 49

Bolivia 4.1 27 16 9 4 44 3 30

Canada 3.1 1 164 3 32 17 2 360 13

Colombia 4.5 358 12 46 22 23 21 21

Guatemala 4.1 60 23 13 4 50 4 47

Malaysia 5.5 314 10 25 11 15 141 10

Pakistan 6.4 440 22 158 55 42 16 12

Philippines 5.0 443 14 83 36 36 41 6

Thailand 5.0 584 10 64 35 49 110 17

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Several of the Cairns Group member countries, most notably the south east Asian countries, are among the fastest growing economies in the world. Agriculture is an important sector in most Cairns Group countries. The Cairns Group includes several countries that are reliant on agriculture as a major source of employment and export earnings. For example, in central American member countries, agriculture’s share of the labor force ranges between 20 and 50 per cent, and agriculture’s share of total exports varies between 36 and 47 per cent.

The Cairns Group accounts for a high proportion of global exports for a number of major agricultural commodity groups. Between 1994 and 2004, the Cairns Group’s share of the value of key world agricultural commodity exports rose appreciably (figure B; United Nations 2006b; FAO 2006). For example, the Cairns Group’s share of the value of world sugar exports expanded from 48 per cent in 1994 to 66 per cent in 2004; for beef it rose from 52 per cent to 84 per cent; and for soybeans it increased from 30 per cent to 54 per cent.

Sustaining more open agricultural export markets is very important for the development of the agriculture sector, in particular, and overall economic growth in general in Cairns Group countries. However, impedi-ments to trade in agricultural products, agricultural export subsidies and domestic support adversely affect

6%

42% 52%

8%8%

84%

52%48% 34% 66%

29%

23%

48% 29%

15%

56%

7%

63%30% 45%

1%

54%

3%

52% 45%

9%

44%47%

14%

57%29%

21%

41%

38%

fig B shares of the value of key world agricultural exports

1994 2004

Beef

Sugarraw centrifugal

Milled rice

Soybeans

Wheatexcludes durum

Dairy products

Key

Cairns GroupRest of the world

EU15, Japan and United States

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world markets by limiting agricultural trade and distorting international commodity prices.

A major factor behind distorted world market conditions for agriculture is govern-ment policy, particularly in key industrialised countries. Some major countries, especially the United States, the European Union and some in north Asia, can fund trade distorting domestic support and export subsidies for their agriculture sectors because they are easily able to draw from considerable amounts of taxpayers’ funds. The existence of high tariffs and special safeguards on key agricultural prod-ucts in some of these major markets reduces opportunities for increased exports from Cairns Group countries.

Potential benefits to the Cairns Group from agricultural trade reform will depend on the nature and extent of reductions in high market access barriers in some of these key markets and cuts to both export subsidies and domestic support (see box 1., p. 15). In addition, new markets, particularly in key developing countries that have rising incomes and population growth, will be sources of increased demand for key agricultural commodities that are exported by Cairns Group countries.

Markets with a reasonable proportion of world consumption and moderate to high tariffs would offer increased scope for additional exports of products of impor-tance to the Cairns Group, such as beef, sugar, rice, soybeans, wheat and skim milk powder, if progress were to be made on trade reform. By examining barriers to trade in these products, it is possible to identify potential markets where reduc-tions in tariffs could be expected to lead to opportunities for substantial increases in Cairns Group agricultural exports.

beef

Several Cairns Group countries have considerable potential to increase exports of beef to the European Union, Japan and Korea if sizable cuts to beef tariffs can be achieved (figure C). The European Union is a large beef market, with an applied tariff of 108 per cent on beef and an import tariff quota for high quality bone-in and boneless cuts of fresh, chilled, and frozen beef — the so-called ‘Hilton beef’ quota. Reductions in the EU beef tariff have the potential to substantially affect world trade in beef.

Japan and Korea are not large consumers of beef from a global perspective, but they are large importers of beef relative to their domestic consumption, and have applied tariffs of 38.5 and 40 per cent respectively. For Japan, the potential for increased imports will depend on the extent of the cut to the bound tariff of 50 per

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cent. A 23 per cent cut in the bound tariff would be needed before there is any growth in Cairns Group exports of beef to Japan as a result of tariff change.

sugar

The United States and the European Union have high tariffs on sugar and also make use of the special safeguard provision. The safeguard provision allows some

Mexico 5%

European Union25 16%

China 14%

fig C beef – share of world consumption, and tariffs, 2005

United States 25%

bound applied

bound applied

bound applied

bound applied

bound applied12% 12%

45%25%

108%108%

26% 26%Japan 2%50%38.5%

bound applied

Korea 1%40% 40%

fig D sugar – share of world consumption, and tariffs, 2005

bound applied

bound applied

289% 289%

bound applied

314% 314%

United States 6%


India 14%150%

60%

bound applied

China 8%50% 50%

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fig E rice (milled)– share of world consumption, and tariffs, 2005

bound applied

bound applied

150%

100%

Nigeria 1%

Korea1%

bound applied

India 21%70% 70%

Bangladesh 7%200%

14%

bound applied

Japan 2%777% 777%

Quota only access

bound applied

China 31%65% 65%

countries to increase tariffs when import prices are below a trigger level or there is a significant increase in imports. The United States has a 314 per cent tariff (comprising a bound tariff of 171 per cent and a safeguard component of 143 per cent), while the European Union has a 289 per cent tariff, including a safe-guard component of 64 per cent (figure D).

India has an applied tariff on sugar of 60 per cent. However, potential scope for additional imports of sugar is limited as India has a bound tariff of 150 per cent.

China imports just 13 per cent of its domestic consumption and has an applied tariff on sugar of 50 per cent. Reducing the bound tariff has the potential to generate increased imports. The main scope for additional Cairns Group exports will be from changing dietary tastes in China, particularly the increased consump-tion of processed foods which contain sugar.

rice

With the exception of Nigeria, which has a heavy reliance on imports for domestic consumption, most major rice consuming countries, including China, India, Bangla-desh, Japan and Korea, source most of their consumption from domestic production. China has an import tariff quota for rice, while Korea has quota-only access to its

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rice market. There is substantial potential for additional market access because these countries strictly control imports of rice. Large cuts to bound tariffs could pro-vide scope for benefits to rice exporting countries in the Cairns Group (figure E).

soybeans

The Republic of Korea has a high applied tariff on soybeans. Reductions to its bound tariff would be important to soybean exporters in the Cairns Group (figure F). This is also the case for India, although a reduction of at least 70 per cent in India’s bound tariff would be needed before additional trade might occur.

China’s applied tariff is fairly small, with 65 per cent of domestic soybean consumption being sourced from imports. The main scope for additional Cairns Group exports will be from increased derived demand for soybeans in China, triggered by rapidly growing demand for livestock products, especially meat and dairy products, associated with significant growth in incomes.

wheat

China has an applied tariff on wheat of 65 per cent, and an import tariff quota for wheat (figure G). China’s imports of wheat under the tariff quota are well within the specified limit because quota administration regulations allow state trading enterprises to control 90 per cent of the quota.

fig F soybeans – share of world consumption, and tariffs, 2005

bound applied

India 3%100%

30%

bound applied

487% 487%

bound applied

China 21%3% 3%

bound applied

Mexico 2%45%

15%

Korea1%

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Imports of high quality wheat (more than 14 per cent protein content) by the European Union are subject to complex import arrangements, and all other wheat is subject to a tariff estimated at 59 per cent that is currently not allowing further trade to occur. Large reductions to these barriers are required before additional trade could occur.

The potential for increased trade from tariff cuts in India is limited because the bound tariff on wheat is presently set at 100 per cent, but the applied tariff is only 50 per cent. This means that the bound tariff would need to be reduced by over 50 per cent before there is any impact on India’s internal wheat prices, and before additional trade might flow.

Even though Japan has a 252 per cent applied tariff on wheat, an estimated 94 per cent of consumption is already being sourced from imports. Japan’s slower population growth will result in declining levels of food demand as activity levels and the caloric needs of the aging population decrease over time. Increased consumption in a high income country such as Japan will be driven largely by consumer tastes, and less by falling internal prices as a result of any future bound tariff reductions.

skim milk powder

The European Union, the United States and Japan have significant tariffs on skim milk powder (figure H). The European Union has an 80 per cent applied tariff on imports. The US applied tariff is presently 63 per cent. Even small changes in EU

fig G wheat – share of world consumption, and tariffs, 2005

bound applied

bound applied

59% 59%European Union25 19%

India 12%100%

50%

bound applied

Japan 1%252% 252%

bound applied

China 16%65%

1%

65%

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and US internal prices could as a result of future bound tariff reductions have a large effect on world markets.

If sizable tariff cuts could be achieved, the Japanese market would provide consid-erable export potential, with a tariff of 218 per cent and just over 15 per cent of domestic consumption being sourced from world markets.

India accounts for around 7 per cent of world consumption and has an applied tariff of 60 per cent. This indicates that considerable increases in skim milk powder trade are possible if sizable bound tariff cuts could be achieved.

fig H skim milk powder – share of world consumption, and tariffs, 2005

bound applied

218% 218%

bound applied

bound applied

80%80%

bound applied

63% 63%

United States 17%


Japan 6%

India 7%60%60%

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table 3 recent analyses of potential economic benefits of trade reform

analyses key assumptions

estimated world benefits

in real terms

implementation period for

liberalisation

year for which estimated benefits

are reported

World Bank(Anderson et al. 2006)

Full global merchandise trade liberalisation (simulated using World Bank’s LINKAGE/GTAP model)

287 2001–15 2015

20202007–20219Full trade liberalisation (simulated using CEPII’s MIRAGE model)

IFPRI(Bouet et al. 2006)

US$b

need for trade reform

Even after attempts during the Uruguay Round of multilateral trade negotiations to develop rules and mechanisms to generate benefits from more open and less distorted markets, barriers to freer agricultural trade remain high. Despite WTO members agreeing to reduce their barriers to market access, export subsidies and their trade distorting forms of domestic support to agriculture, substantial barriers still limit agricultural exports from Cairns Group countries and lower the world market prices that their producers receive (see Podbury et al. 2005).

The Cairns Group stands to gain significantly from multilateral trade liberalisation. This is reflected in the estimated potential economic benefits from trade liberalisa-tion to the global community, including the Cairns Group (table 3).

The magnitude of the potential gains for the Cairns Group from multilateral agricultural trade reform will depend on the nature and extent of improvements in market access and reductions in domestic support in key countries that have trade distorting agricultural policies.

With consideration of a new US farm bill scheduled for 2007, there is an oppor-tunity for the United States (as a major player in the multilateral trade negotiations process) to change its farm policies. A new farm bill could be shaped to improve the overall welfare of the US farm sector and generate gains for others (Nair et al. 2005; McDonald et al. 2006).

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suspension of the Doha Round

In suspending the Doha Round of multilateral trade negotiations on 24 July 2006, WTO Director-General Pascal Lamy urged WTO member countries to take ‘time out to review the situation, time out to examine the available options and time out to review positions’ (WTO 2006a). The progress made on the various elements of the negotiating agenda up to July 2006, including the key outcomes of the Hong Kong ministerial meeting (box 1), has been put on hold, pending the resumption of the multilateral trade negotiations when the negotiating environment is appropriate.

Well before the suspension of the Doha Round, a range of negotiating proposals for agricultural trade reform were put on the table by WTO members (box 2).

box 1: key outcomes of the Hong Kong ministerial meeting, Dec. 2005

agreement among WTO members: agriculture negotiations

market access

Four bands for structuring cuts to bound tariffs (the maximum rates that WTO members agreed not to exceed), with each band covering a different range of initial tariffs.

domestic support

Three bands for reductions in the aggregate measurement of support (AMS) and in overall trade distorting domestic support, with larger cuts in the highest bands:

> band 1 – the member with the highest level of support

> band 2 – the two members with the second and third highest levels of support

> band 3 – all other members

Developed country members in the lower bands with high levels of AMS relative to their total value of agricultural production will make an additional cut in AMS.

export subsidies

The parallel elimination of all forms of export subsidies and disciplines on all export measures with equivalent effect to be completed by the end of 2013. All forms of export subsidies for cotton to be eliminated by developed countries in 2006.

Source: WTO (2005).

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box 2: key elements of the US, EU and G20a agriculture proposals

market access

United States European Union G20

domestic support

United States European Union G20

a Argentina, Bolivia, Brazil, Chile, China, Cuba, Egypt, Guatemala,India, Indonesia, Mexico, Nigeria, Pakistan, Paraguay, Philippines, South Africa, Tanzania, Thailand, Uruguay, Venezuela and Zimbabwe.Note: Given that agreement was reached on the elimination of export subsidies, proposals relating to export subsidies are not reported here.Sources: European Commission (2005); ICTSD (2005); USTR (2005).

Bound tariff cuts of 55–90% (maximum cuts where bound tariffs are over 60%)

Tariffs capped at 75% for developed countries

1% of total agricul-tural tariff lines can be nominated as ‘sensitive products’



8% of total agricultural tariff lines can be nominated as ‘sensitive products’



Cuts to overall trade distorting domestic support of 80% in the first band, 75% in the second band, and 70% in the third band

Cuts to AMS of 80% in the first band, 70% in the second band, and 60% in the third band



‘Blue box’ capped at 5% of the total value of agricultural production

Cut de minimis support by 80%



‘Blue box’ capped at 2.5% of the total value of agricultural production

Cut de minimis support by 50%

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These proposals are characterised by different levels of ambition for reductions in domestic support and improvements in agricultural and nonagricultural market access.

There is also a need for clarification in several areas, such as provisions for sensi-tive products, special products and the special safeguard mechanism in market access negotiations for agriculture and the disciplines on blue box (box 3).

box 3: domestic support and WTO ‘boxes’

greenbox

Domestic support is categorised as ‘green box’ if it is considered to be minimally trade distorting. Categories of such support include government services and infra-structure, decoupled income support payments, disaster relief payments, invest-ment aids and environmental and regional payments. These payments are exempt from any reduction commitments or limitations.

bluebox

Under the Uruguay Round Agreement on Agriculture, ‘blue box’ support refers to direct payments that would normally be classified as trade distorting but that are provided under production limiting arrangements, such as area reduction programs or payments based on a fixed number of animals. Blue box support is currently exempt from reduction commitments or limitations.

amberbox

‘Amber box’ support is acknowledged to be trade distorting. The main compo-nents of amber box support are market price support and nonexempt government payments. Amber box support was subject to reduction commitments under the Uruguay Round Agreement on Agriculture.

deminimis

The de minimis provisions were designed to allow members to maintain low levels of distorting support. Under the de minimis provisions, if the value of support is less than a specified percentage of the value of agricultural production the support is not included in the aggregate measurement of support (AMS) and so is not subject to reduction commitments. However, if the value of support exceeds the specified percentage, all of that support is included in the AMS and is subject to the required AMS cuts and limitations.

Source: Nair et al. (2006).

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Among other issues, the resumption of the Doha Round of multilateral trade nego-tiations is likely to be influenced by the extent to which the gap in reform ambition between key WTO member countries — on improving market access and reducing domestic support — can be narrowed. In this context, the potential for increases in Cairns Group agricultural exports will be influenced by a number of key factors. These factors include the following.

size of agricultural tariff cuts

Substantial reduction of barriers to agricultural trade would provide opportunities for Cairns Group countries to increase their economic growth through trade reform. Large reductions in bound tariffs for key agricultural products in several major developed countries would be needed before it would be possible to bring about any improvements in agricultural market access.

However, some of the prospective gains to Cairns Group agricultural exporters would be constrained if key protectionist countries used the sensitive products provision to exempt politically sensitive commodities from significant tariff cuts. As part of the special and differential treatment afforded to developing countries, there is a special products category for which tariffs are subject to lesser cuts. Coupled with the new developing country special safeguard mechanism, these provisions have the potential to undermine the benefits from tariff cuts.

removal of special safeguards and other import restraints

Efficient agricultural exporters in the Cairns Group would benefit if market access restricting mechanisms that are already in place, namely special safeguards and effective import restraints through tariff quota administration, were removed.

When import prices drop sharply or if there is a significant increase in imports, the special safeguard provisions enable WTO members to temporarily raise the tariff for certain agricultural products to above the permitted bound level. Cairns Group agricultural exporters may not be assured improved market access through tariff quota expansion if key protectionist countries use tariff quota administration to control the competition that domestic industries face from imports.

The ability of governments to influence imports through administrative arrange-ments, import standards and government controls tend to restrict the extent to which tariff quotas can be filled.

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reduction in domestic support

The major countries that provide significant levels of overall trade distorting domestic support (adding up amber box, blue box and de minimis support) have shown a willingness to change mechanisms for providing support (box 3). They have shifted trade distorting domestic support from the amber box, where the support is subject to limitations, to the blue and green boxes, where support is not currently limited but is considered less trade distorting than the amber box.

However, these countries have not been prepared to substantially reduce overall levels of domestic support. Shifting support can open up the gap between the permitted levels of distorting domestic support that are subject to agreed limits and the levels actually used. This means that agreed cuts would need to be large enough not only to eliminate the gap created but to reduce actual levels of distorting support. Under such conditions, gains from trade will also depend on the extent to which the other various forms of domestic support are less trade distorting.

timing of support reductions

The sequencing and timing of the reduction in domestic support in key countries and improvement in market access for agricultural products could also have a bearing on the overall benefits to the Cairns Group. For example, appreciable reduction in market access barriers at an early stage of any reform implementation process is likely to result in favorable trade effects beginning to flow through in the near term. On the other hand, producers that receive significant levels of domestic support will take a longer period of time to respond to any agreed phasing out or reduction of domestic support in key countries. Hence, in such circumstances, the favorable trade effects from reducing domestic support payments are likely to take longer to materialise.

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impact of trade reform

It is not clear when the Doha Round will resume. Hence, any analysis of possible multilateral trade reform outcomes is illustrative only. The only available information that may provide some broad insights into the range of respective positions of key members of the WTO is the negotiating proposals that have been put on the table since October 2005 (box 2).

Given this background, two illustrative agricultural trade reform scenarios — based on the underlying key elements (such as domestic support cuts, agricultural tariff reduction approaches, sensitive products and tariff caps) of the negotiating proposals tabled during the Doha Round — are examined, with the potential impli-cations for Cairns Group countries also assessed.

description of scenariosIn both scenarios, it is assumed that the specified illustrative agricultural trade reforms will be gradually implemented over a five year period (ten years for devel-oping countries) commencing in 2007.

scenario 1 – less market oriented multilateral agricultural trade reform

key assumptions for scenario 1

market access

> bound tariff cuts of 20%, 30%, 35% and 40% in 4 bands: 0-30, 30-60, 60-90 and >90 (maximum cuts where bound tariffs are over 90%)

> no tariff caps for developed countries and developing countries

> 8% of total agricultural tariff lines nominated as ‘sensitive products’

> reduction commitments by developed countries will be phased-in over five years

> tariff cuts for developing countries will be two-thirds of the cuts required by developed countries; reduction commitments by developing countries will be phased-in over 10 years

4

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domestic support

> cuts to overall trade distorting domestic support of 70% in the first band, 50% in the second band and 30% in the third band

export subsidies

> eliminate export subsidies by 2013

scenario 2 – more market oriented multilateral agricultural trade reform

key assumptions for scenario 2

market access

> bound tariff cuts of 65%, 75%, 85% and 90% in 4 bands: 0–20, 20–40, 40–60 and >60 (maximum cuts where bound tariffs are over 60%)

> bound tariffs capped at 75% for developed countries and 100% for devel-oping countries

> 1% of total agricultural tariff lines nominated as ‘sensitive products’

> reduction commitments by developed countries will be phased in over five years

> tariff cuts for developing countries will be two-thirds of the cuts required by developed countries; reduction commitments by developing countries will be phased in over 10 years

domestic support

> cuts to overall trade distorting domestic support of 80% in the first band, 75% in the second band and 70% in the third band

export subsidies

> eliminate export subsidies by 2013

quantitative analysis of scenariosABARE’s global trade and environment model (GTEM) is used to analyse the scenarios described above. GTEM is a dynamic computable general equilibrium model of the world economy and is based on the GTAP version 6 database. It captures intersectoral effects and links regions through trade and investment, making it a suitable tool to analyse the effects of trade reform. Detailed information on GTEM is available on ABARE’s web site (www.abareconomics.com).

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change in agricultural exports in 2016 under scenario 1relative to the reference case

fig I

US$b2005

2

4

6

8total

developed countries

developingcountries

worldCairns Group

The GTEM simulation results for developing countries in the Cairns Group, developed countries in the Cairns Group and the Cairns Group as a whole are analysed, with a particular focus on key variables including agricultural exports. The GTEM simulation results are expressed, unless otherwise stated, as deviations from the corresponding levels in the ‘reference case’, where current policies are maintained. Simulation results are reported for 2016. Additionally, in reporting the simulation results, values are expressed in 2005 US dollars

scenario � – less market oriented multilateral agricultural trade reform

The less market oriented scenario includes the less reform oriented elements of the negotiating proposals that have been put on the table since October 2005.

impact on trade in agricultural products

In this scenario, total agricultural exports from Cairns Group countries expand by US$6.8 billion in 2016, relative to the reference case (figure I). In addition, world agricultural trade is estimated to increase by US$8.9 billion in 2016, relative to the reference case.

impact on gross value of agricultural production

In this scenario it is estimated that the gross value of agricultural production for the Cairns Group increases by US$6.8 billion in 2016, relative to the reference case.

This represents an increase of 1.7 per cent in the gross value of production in the agriculture sectors of Cairns Group countries in 2016, relative to the reference case. In the case of Australia, the increase in the gross value of production in the agriculture sector under this scenario is estimated to be 2.3 per cent in 2016, and for New Zealand 3.1 per cent, relative to the reference case. For Argentina and Brazil, the increases are estimated to be 1.9 per cent and 2.6 per cent respectively in 2016, relative to the reference case.

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scenario � – more market oriented multilateral agricultural trade reform

While the Doha Round is currently suspended, achieving a more reform oriented, or more market oriented, outcome in the multilateral trade negotiations is still the best opportunity to deliver substantial benefits to Cairns Group members and the global community, as demonstrated in this analysis.

impact on trade in agricultural products

More market oriented multilateral agricultural trade reform would lead to substantial expansion in agricul-tural exports from Cairns Group members. In this scenario, total agri-cultural exports from Cairns Group countries expand by US$20 billion in 2016, relative to the reference case (figure J).

Developing countries in the Cairns Group account for over two-thirds of the total increase in exports. Total agricultural exports from developing country members are estimated to increase by US$14 billion in 2016, relative to the reference case. This outcome arises because reform leads to efficiency gains as distortions within indi-vidual Cairns Group economies are reduced. More market oriented multilateral agricultural trade reform also substantially increases total global agricultural trade. In this scenario, world agricultural trade is estimated to increase by US$47 billion in 2016, relative to the reference case.

impact on gross value of agricultural production

Under more market oriented agricultural trade reform there is also a substantial increase in the gross value of agricultural production for Cairns Group producers. In this scenario it is estimated that the gross value of agricultural production for the Cairns Group increases by US$20 billion in 2016, relative to the reference case.

change in agricultural exports in 2016 under scenario 2relative to the reference case

figJ

US$b2005

10

20

30

40

total

developed countries

developingcountries

worldCairns Group

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This represents an increase of nearly 5 per cent in the gross value of production in the agriculture sectors of Cairns Group countries in 2016, relative to the reference case. In the case of Australia, the increase in the gross value of production in the agriculture sector under this scenario is estimated to be 4.9 per cent in 2016, and for New Zealand 7.4 per cent, relative to the reference case. For Argentina and Brazil, the increases are estimated to be 5.6 per cent and 11.9 per cent respec-tively in 2016, relative to the reference case.

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references

Anderson, K., Martin, W. and van der Mensbrugghe, D. 2006, ‘Market and welfare implications of Doha reform scenarios’ in Agricultural Trade Reform and the Doha Development Agenda, World Bank, Washington DC.

Bouet, A., Mevel, S. and Orden, D. 2006, Two Opportunities to Deliver on the Doha Development Pledge, International Food Policy Research Institute, Wash-ington DC, July.

European Commission 2005, ‘Making Hong Kong a success: Europe’s contribu-tion’, Brussels (http://europa.eu.int/comm/trade/issues/newround/doha_da/offerdda_en.pdf).

FAO (Food and Agriculture Organisation of the United Nations) 2006, FAOSTAT online databases, Rome (http://faostat.fao.org/default.aspx).

ICTSD (International Centre for Trade and Sustainable Development), 2005, ‘G20 proposal on market access’, Geneva, 12 October (www.agtradepolicy.org/output/resource/G20MarketaccessproposalOct05.pdf).

IMF (International Monetary Fund) 2006, World Economic and Financial Surveys, Washington DC.

McDonald, D., Nair, R.,Podbury, T., Sheldrick, B., Gunasekera, D. and Fisher, B.S. 2006, US Agriculture without Farm Support, ABARE Research Report 06.10, Canberra, September.

Nair, R., Chester, C., McDonald, D., Podbury, T., Gunasekera, D. and Fisher, B.S. 2005, Timing of the US Farm Bill and WTO Negotiations – A Unique Opportu-nity, ABARE eReport 05.11, Canberra, November.

Nair, R., McDonald, D., Jacenko, A. and Gunasekera, D. 2006, ‘Multilateral trade reform – potential trade impacts of the Doha Round’, Australian Commodities, vol. 13, no. 1, March quarter, pp. 209–19.

Podbury, T., Shaw, I., Nair, R., Jacenko, A., Gunasekera, D. and Fisher, B.S. 2005, Reducing barriers to farm trade, ABARE conference paper 05.18 presented at the Victorian Regional Outlook Conference, Ballarat, 20 July.

United Nations 2006a, UN Population Fund, New York.

—— 2006b, UN Commodity Trade Statistics Database, New York.

USTR (Office of the United States Trade Representative) 2005, ‘U.S. Proposal for

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WTO agriculture negotiations’, Washington DC (www.ustr.gov/Trade_Sectors/Agriculture/US_Proposal_for_WTO_Agriculture_Negotiations.html).

World Bank 2006, World Development Indicators, Washington DC.

WTO (World Trade Organisation) 2005, Doha Work Programme, Decisions adopted by the General Council on 18 December 2005, WT/MIN(05)/DEC, Geneva, 22 December.

——2006a, Doha Work Programme, Informal Trade Negotiations Committee meeting at the level of Head of Delegation on 24 July 2006, Geneva.

—— 2006b, International Trade Statistics, Geneva.

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RESEARCh FUNDiNG ABARE relies on financial support from external organisations to complete its research program. As at the date of this publication, the following organisa-tions had provided financial support for ABARE’s research program in 2005-06 and 2006-07. We gratefully acknowledge this assistance.

Agricultural Production Systems Research Unit

Asia Pacific Economic Cooperation Secretariat

AusAid

Australian Centre for International Agricultural Research

Australian Gas Association

Australian Greenhouse Office

Australian Wool Innovation Limited

Commonwealth Secretariat, London

CSIRO (Commonwealth Scientific and Industrial Research Organisation)

Dairy Australia

Department of Business, Industry and Resource Development, Northern Territory

Department of the Environment and Heritage

Department of Foreign Affairs and Trade

Department of Industry, Tourism and Resources

Department of Infrastructure, Victoria

Department of Natural Resources and Mines, Queensland

Department of Primary Industries, New South Wales

Department of Primary Industries, Queensland

Department of Primary Industries, Victoria

Department of Prime Minister and Cabinet

Department of Transport and Regional Services

East Gippsland Horticultural Group

Fisheries Research and Development Corporation

Fisheries Resources Research Fund

Food and Agriculture Organisation of the United Nations

Forest and Wood Products Research and Development Corporation

Grains Research and Development Corporation

Grape and Wine Research and Development Corporation

GHD Services

Horticulture Australia

Independent Pricing and Regulatory Tribunal

Institute of National Affairs, Papua New Guinea

International Food Policy Research Institute

ITS Global

Land and Water Australia

Meat and Livestock Australia

Minerals Council of Australia

Ministry for the Environment, New Zealand

Ministry of Foreign Affairs and Trade, New Zealand

Ministry of Prime Minister and Cabinet, New Zealand

National Australia Bank

National Oceans Office

Newcastle Port Corporation

Organisation for Economic Cooperation and Development

Plant Health Australia

Pratt Water

Rio Tinto

Rural Industries Research and Development Corporation

Snowy Mountains Engineering Corporation

University of Queensland

US Environmental Protection Agency

WA Global Ocean Observing System

Wheat Export Authority

Woodside Energy

Woolmark Company

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